Here’s Why Groupon Could be the Worst Public Investment Ever

Groupon is hot. Hotter than LinkedIn (NYSE:LNKD). It’s also a brilliant example of a smart team of people pursuing a Blue Ocean Strategy.

Unfortunately, the once blue ocean has quickly filled with red as countless competitors enter the space on a daily basis. A savvy investor asks, “What’s the barrier to entry?” NONE. The only competitive advantage large daily deal sites have is the size of the email lists they promote to businesses. However, in the case of local proprietors such as restaurants and spas, local newspapers and other businesses will likely have a MUCH LARGER email list of prospective local customers.

“In the first three months of this year, it had a net loss of $103 million. (For all of 2010, its loss was $414 million.) What is it spending money on? Well, $180 million was spent on online advertising in the first three months of the year. It’s also paying 7,000 employees, which isn’t cheap.”

Basically, Groupon needs an ever-increasing army of employees to combat the omnipresent threat of local daily deal sites. They also need to spend a ton on marketing in an attempt to drown out the voices of competitors.

In addition to what now looks like a very low margin business at Groupon’s level, the company is plagued with insiders dumping shares faster than you need to sign up for today’s daily deal. As we wrote this morning, “In total, Groupon has paid out $930 million to employees and investors. Equally alarming, in spite of losing $390 million from operations in 2010, Groupon spent $52.9 million buying preferred shares. The obvious question raised by all this is why preferred shareholders seem to be squeezing as much out of the company during these preliminary stages.” (See “Groupon’s Questionable Financial Disclosures“)

This looks like the classic case of “do what we say, not as we do”. If Groupon investors and insiders truly believed the company is worth $20 billion (DealBook now reports they may be able to attain a $30 billion valuation) and has plenty of upside remaining for the public to make a good investment, WHY ARE CURRENT SHAREHOLDERS SELLING AT A FRENZIED PACE?

The common sensical reason: even Groupon’s insiders know they probably have a once in a lifetime opportunity to get this valuation and the future is very unknown at best.

Internet goliath Amazon (NASDAQ:AMZN) — the owner of Groupon competitor and market share thief Living Social — is rolling out the logical endgame business in the daily deal space: a daily deal site aggregator, AmazonLocal. That’s right. Amazon — and likely Google (NASDAQ:GOOG) with their new Google Offers — will offer deal seekers a bargain they can’t refuse: all the daily deals in your area in one place!

The move will swallow Groupon whole and make Groupon analogous to a company which sells tickets online to only one airline while the aggregators — Priceline (NASDAQ:PCLN), Expedia (NASDAQ:EXPE), TravelZoo (NASDAQ:TZOO), Orbitz (NYSE:OWW), etc — are the true winners. For this one reason alone I think Groupon’s current valuation will be as ephemeral as the morning fog.

If Groupon is to be more than another first-mover sacrificed while using a machete to cut new paths in the jungle, they MUST pivot into a daily deal aggregator and focus on building a world-class BRAND which consumers think of when they think “daily deal”. Anything short of that and public shareholders have a very good chance of becoming public bag holders.